Stocks Lower into Final Hour on Rising Long-Term Rates, Higher Energy Prices, More Shorting

BOTTOM LINE: The Portfolio is slightly higher into the final hour on gains in my Technology longs. I added (IWM)/(QQQQ) hedges today, thus leaving the Portfolio 75% net long. The tone of the market is mildly negative as the advance/decline line is lower, most sectors are declining and volume is about average. Investor anxiety is above average. Today’s overall market action is mildly bearish. The VIX is rising 2.38% and is very high at 31.35. The ISE Sentiment Index is slightly below average at 130.0 and the total put/call is about average at .81. Finally, the NYSE Arms has been running around average most of the day, hitting 1.1 at its intraday peak, and is currently .97. The Euro Financial Sector Credit Default Swap Index is rising .14% today to 119.0 basis points. This index is down from its record March 10th high of 208.75. The North American Investment Grade Credit Default Swap Index is falling .38% to 143.27 basis points. This index is also well below its Dec. 5^th record high of 285.99. The TED spread is rising 4.49% to 52 basis points. The TED spread is now down 411 basis points since its all-time high of 463 basis points on October 10th. The 2-year swap spread is rising 9.43% to 43.50 basis points. The Libor-OIS spread is rising 1.76% to 46 basis points. The 10-year TIPS spread, a good gauge of inflation expectations, is rising 10 basis points to 1.92%, which is down 72 basis points since July 7th. The 3-month T-Bill is yielding .16%, which is down 1 basis point today. Market-leading stocks are substantially outperforming the broad market again today. The construction, semi, gaming, steel and alternative energy sectors are also gaining on the day. The rise in the 10-year yield is pressuring the broad market this afternoon, with banks and reits seeing the most selling pressure. I expect the 10-year to stabilize soon, but stocks are unlikely to move meaningfully higher until the yield surge subsides. I would expect the Fed to announce plans to increase the size of its quantitative easing program over the coming weeks. Nikkei futures indicate a -48 open in Japan and DAX futures indicate a -33 open in Germany tomorrow. I expect US stocks to trade mixed-to-lower into the close from current levels on more shorting, higher energy prices, profit-taking and higher long-term rates.